People new to the world of finance are often blinded by all the options available for investing in the stock market:
– Direct investments in stocks – but which ones? Growth? Value? Invest far and wide? Or only in a few?
– Trading stocks or options – how to value and trade? Fundamental Analysis? Technical Analysis?
– Investing in packaged products – Mutual Funds? Index funds? ETF’s? REIT’s?
I wrote a post recently that summarized these options; here I simply want to add a little more info …
The building of a factory used to produce goods and the investment one makes by going to college or university are both examples of investments in the economic sense.
This means that the true definition of an investment is something that makes a little money now, or more likely a lot of money in the future.
Therefore, while I say that there are three sensible ways to invest in stocks, there are only two investment methods recommended by Warren Buffet:
1. Buy and Hold low cost, diverse Index Funds (check out Vanguard‘s web-site, and others) – this is a long-term, low risk (if your holding periods are 20 – 30 years) strategy that can help you fund a normal retirement.
“By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals” W. E. Buffett – 19932.
2. Invest in a FEW stocks in companies that are (a) undervalued (b) have a large margin of safety (c) that you love and (d) are prepared to HOLD until the rest of the market decides that they love them, too (at which point you can cash out or keep holding for the long/er term). “I never attempt to make money on the stock market … Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” W. E. Buffett
Speculation should not be considered purely a form of gambling, as speculators do make informed decisions before choosing to acquire the additional risks. Additionally, speculation cannot be categorized as a traditional investment because the acquired risk is higher than average.
So, take Warren’s advice: unless you have a strong reason to do otherwise, stick to one – or both – of the only two ways of investing in stocks and, over the long-term you are very likely to outperform all but the luckiest of those speculators out there …